EUROPE by Peter WestmoreNews Weekly
Greek tragedy takes another twist
, May 9, 2015
The phrase “Greek tragedy” has come to refer to a play, usually a psychological drama which is conducted in front of a mass audience, and terminates in the defeat or death of the main character.
As developments unfold in the economic and political crisis in Athens, it seems that life is imitating art.
The Greek financial crisis has its origins in the Global Financial Crisis of 2007-08, when the shadowy world of collateralised debt obligations, in other words, debt packages, collapsed. With it, some of the largest financial institutions in North America, Britain and Western Europe went bankrupt.
The consequences of a collapse in large financial institutions was that governments were called in to stand behind the banking system, and there was a universal loss of confidence in a financial system which recklessly allowed debts to rise without a corresponding increase in the capacity to repay.
After years of ignoring the problem of bad debts and debt-worthiness, governments which had been recklessly negligent about what had been happening in the deregulated financial markets all of a sudden were faced with huge and often unsustainable liabilities.
Several countries – including Ireland, Iceland, Spain and Greece – went bust, and were bailed out only by financial aid packages from bodies such as the International Monetary Fund, the World Bank and the European Central Bank.
The international banks imposed draconian austerity measures to bring government spending under control and to cut deficits.
Of all the European countries, Greece has suffered most, with now five years of economic austerity. Unemployment rates have risen above 25 per cent – among youth the rate is above 50 per cent – and still no sign of an economic recovery.
Meanwhile, Greece’s debts have blown out to €320 billion (nearly $450 billion).
In the face of this continuing crisis, last December Greece’s centre-right government collapsed and a snap election was held on 25 January which put the radical left Syriza party into government, on a promise of ending the austerity program and Greece’s humiliation at the hands of Germany and the European banks.
Over the past three months, there have been lengthy negotiations between Greek Finance Minister Yanis Varoufakis – a Greek-Australian academic, who is demanding an end to the crippling austerity program which has accompanied the bailout – and leaders of the European Union and the European Central Bank, who insist that Greece has to reform its economy, cut its generous social spending, sell public assets, increase taxation and run a budget surplus.
Out of money
It seems that the crunch will soon arrive, as Greece’s finance ministry spokesman said recently that Greece would run out of money shortly.
It is anyone’s guess how this is going to play out.
Despite Varoufakis’ efforts to reach an agreement under which Greece will remain in the Eurozone, the powerful left wing of the Syriza party which wants Greece out of the Eurozone, secured more than 40 per cent of the vote in a ballot against acceptance of the latest austerity plan.
Eurozone leaders have reportedly asked the leader of Syriza, Alexis Tsipras, to reject the anti-euro elements in his own party, and to form a grand coalition with the leftist Panhellenic Socialist Movement, the anti-austerity Independent Greeks party, and elements of New Democracy, the former centre-right governing party.
However, this is unlikely to happen as Tsipras was elected with a mandate to stand up to the EU, specifically Germany, which is (wrongly) blamed for Greece’s self-inflicted debt crisis.
The problem is that Greece’s alarming economic situation has led to a flight of capital and a decline in both domestic manufacturing and exports, weakening the its economic position even further.
The pro-euro majority in Syriza believes the rhetoric that it is wrong in principle and impossible in practice to withdraw from the Eurozone. They also believe that at the end of the day, the countries of the Eurozone must keep Greece inside, otherwise the whole edifice will collapse.
They point to the fact that if Greece repudiates its debts, it will bring about a financial crisis in the Eurozone and the possible bankruptcy of several of the largest European banks that have lent heavily to Greece.
There is a real danger that Syriza’s leaders have miscalculated.
While Syriza has the US, France and Italy making sympathetic noises, they are outweighed by a coalition of pro-austerity countries around Germany which continually blocks any attempt by the European Commission to reach a deal based on abandoning the austerity program.
In the meantime, ordinary Greeks are becoming increasingly restless. The hope of an end to austerity after the elections has disappeared.
At the same time, opposition to the European Commission, the European Central Bank and the Eurozone itself, seems to be rising.
One well-placed journalist, Paul Mason, wrote recently: “Publicly Varoufakis has adopted a tone not just of conciliation but of reconstruction with the Eurozone. Privately, however, his advisers – and these are the some of the most centrist people in and around Syriza – are shocked by the level of hostility they met inside the Eurozone.
“That wing of Syriza that is basically left-social democratic was existentially attached to the euro. Now that existential belief in the euro is being shaken. And the danger for the Eurozone is, such a process can be replicated among an entire people if the evidence is marshalled convincingly.
“If pushed over the edge – either by the failure of a short-term debt auction or the simple shortfall of receipts – Varoufakis will have no trouble triggering capital controls, emergency taxation of big business and the inauguration of a second currency.
“At this point it would be up to the Eurozone to react. But if it upped the ante, there are powerful weapons in Greece’s armoury: the €80 billion it owes the Eurozone … which is unprotected. Then the debts it owes the European Central Bank.”
On the other hand, the latest figures show that the debt crisis in Europe is getting worse.
Official figures released on 20 April show that government debt in the euro area at the end of 2014 surged to the highest levels since the introduction of the single currency, and Greece’s position was the worst of all.
Greece’s debt swelled to a new high of 177.1 per cent of gross domestic product (GDP), up from 175 per cent a year earlier, the EU’s statistics office in Luxembourg said. For the Eurozone as a whole, government debt rose to a record 91.9 per cent of GDP last year from 90.9 per cent in 2013.
The data also showed that other Eurozone economies were still struggling to control debt levels even as recovery across the currency region gathered pace.
Italy’s debt mountain increased and remained as the second-highest in Western Europe after Greece, going up to 132.1 per cent of GDP in 2014 from 128.5 per cent the previous year.
Portugal, in third place, saw its debt rise to 130.2 per cent of GDP from 129.7 per cent, while in Ireland, next in line, debt fell to 109.7 per cent from 123.2 per cent. Both countries received international bailouts at the height of the euro crisis.
The data also show that some Eurozone countries are struggling to reduce their budget deficit growth to within the EU’s 3 per cent of GDP limit. France, the region’s second-biggest economy, posted a deficit growth of 4 per cent in 2014, down from 4.1 per cent.
Cyprus had the widest deficit growth, at 8.8 per cent of GDP, while Spain recorded a deficit growth of 5.8 per cent, narrowing from 6.8 per cent the year before. Greece posted a deficit growth of 3.5 per cent.
These figures will confirm the view of the majority of Eurozone countries that the debt crisis must be tackled now, otherwise the debt contagion will spread.
Douglas Elliott, an economist with the Brookings Institution and former managing director of JPMorgan, provided an interesting appraisal of the standoff between Greece and the EU.
He wrote recently: “Greece, which is quickly running out of cash, pledged to its Eurozone partners in February that by the end of April it would agree with creditors on a comprehensive list of actions to unlock its remaining bailout funding.
“The debt-troubled nation was supposed to present the list to Eurozone finance ministers [recently], but it’s unlikely that a package will be agreed even by the end of the month.”
He added: “As a result, in the next several weeks, the situation in Greece may deteriorate rapidly. The country could eventually fall out of the euro, despite the intention on all sides to avoid that outcome.”
Elliott argued that this need not occur, provided both sides showed flexibility.
“Greece would have to compromise more than its European partners, but both sides would have to cross lines they have drawn in the sand. Europe would have to accept that the previous economic programs they foisted on Greece were flawed and substantial modifications needed.
“Greece would have to accept that most of their problems are their own fault and that borrowing hundreds of billions of euros from the rest of Europe inevitably requires handing over some control to the lenders and accepting painful reforms,” he said.
According to Elliott, the core problem is that the Syriza Government in Greece views the world very differently from the governments in the rest of Europe.
“Syriza”, he pointed out, is a Greek acronym for “The Party of the Radical Left” and “those last two words should be taken very seriously. Long-term members of Syriza, such as most of the members of Parliament, are suspicious of, or even actively hostile to, capitalism and the European system of economic governance.
“They do not see why Greece should follow a path of ‘reforms’ that read to them like a right-wing wish list.”
As Athens faces the next round in its struggle for survival, Europe itself is facing a Greek tragedy, and there are no prizes for guessing what might happen to the leading player.